Lease Vs Buy

This has probably been asked ad infinitum by as many people, but really which is the better option? Also, could someone exactly explain to me how leasing works. Been trying to find information out there, but so much of it is confusing. Here is my situation- Young professional, lives in metro, makes just enough money to meet all needs, had a car which was rear ended and now in a situation to decide whether to buy or lease. I am not attached to the new car smell, but I dont want to spend $5000 on an old car and have to “fix” something or the other immediately. I also heard that banks wont finance anything that is less than $7000 or more than 6 years old than the current year. Is this true?

Any advice is appreciated.

There is no absolute answer to this. It depends on your situation. Since you asked how leasing works, here is a quick rundown.

  1. You select a car you’re interested in and agree on lease terms. (say, 36 months which is a common term)
  2. The leasing company purchases the vehicle from the dealer.
  3. The leasing company allows you to drive the vehicle during the 36 month term in exchange for a monthly payment.
  4. The monthly payment reflects the estimated loss in value to the car over the 36 months plus some profit for the leasing company.
  5. At the end of the 36 months, you return the car and the leasing company resells it as a used vehicle. You also have the option to purchase the car yourself at that time. Remember that a lease is just that…a lease. At the end of the term you have to return the car as you don’t own it…unless you elect the purchase option mentioned above.

Things to note: Leasing companies often restrict your annual mileage (12K or 15K a year are typical). If you exceed that expect to pay a penalty of anywhere from $0.10 - 0.25 per mile. You will also be expected to repair anything that gets damaged on the vehicle during the term. (Such as cracked windshields, dents, etc.)

Of course, when you purchase, you are simply purchasing the car directly from the manufacturer and once you do that you can drive it as much as you wish. Personally, I like to purchase my vehicles. It gives me more freedom than a lease.

As for your statement about banks not financing over 6 years…that’s true for many, but there are some out there that will. Often the interest rate will be higher on older cars.

Good luck. What models are you considering?

How much money do you have saved for a down payment?
What is your monthly budget for car ownership (loan/lease payments, insurance & maintenance)?

And, if you lease, are you willing to make 3 years of lease payments and own nothing at the end?

One thing about owning that is nice; you can make most of your own decisions about the car. Get pre-approved financing if you buy from anybody other than GM or Ford. It’s as good as cash when you want to make them believe you can buy it today.

Get the best price quote you can from your home town dealer and then shop thirty miles away because they will go crazy to beat that price. (Maybe; it works for bicycles some times.) If your home dealer thinks you are lazy, it will cost you more.

Don’t shop at the one place that is open if most others are closed. That probably won’t happen anywhere near a big city anyway. That may be bogus advice, but I told people to go ahead and look around at other places, knowing that they were closed. They came back and I made really good money off them. They looked poor but the Mom owned a store.

The advantage of leasing is that you can drive a nicer car today than you would if you bought one. The disadvantage is that you’ll spend more over the long term (unless you happen to own a business where you can use certain tax rules to your advantage), especially if you happen to exceed the mileage limit. It’s your call as to which is more important to you.

For the average person, buying a car that’s around two years old gives the best combination of value and reliability.

Most banks don’t lend on cars that are too “old”. The specific policy differs from bank to bank.

Leasing is a good option IF; you want a newer car (less repair hassles), and if you drive relatively few miles per year. Most leases allow for 10K or 12K miles per year. If you drive more miles the “excess miles” penalty, charges, and fees can be ridiculous and add greatly to the cost of the lease. If you have a long daily commute or like to take long car trips it can be easy to blast right past 12K miles per year. If you drive few miles the depreciation is factored into the lease price and that makes the monthly payment less for a lease than a bank loan payment.

If you want to buy a relatively newer car you might consider a car coming off lease that is 2, 3, or 4 years old. The good ones end up on the dealer’s lot as “certified pre-owned” used cars. You pay more for certified and some of these programs aren’t as good as others.

Another option is to look for a used rental car. Hertz, and Enterprise sell their own cars and offer a decent warranty. Some don’t care for these cars, but I don’t beat up a rental when I use them and figure most drivers aren’t maniacs either. I might not buy a used Ford Mustang, but a used 4 door sedan should be OK.

Unless you own a business and the car will be used in the business, leasing is the most expensive way of getting the use of a car.

When you lease, you pay the dealer, then you pay the leasing company. Very likely at the end of your lease you will find that the leasing company has a surprise for you in the form of various charges they hid in all that fine print. Of course if you have an accident, want to end the lease early etc. the leasing company will have special charges for all that as well.

One more reason leasing is the most expensive way to buy a car - you’ll always be paying for the first two or three years of a car’s depreciation, which are by far the highest-cost years for depreciation. And depreciation is the largest cost in owning a new car. As others have said, buying a two or three year old car and keeping it for, say, ten years is a much cheaper way to own a car long term.

There is no absolute answer to this.

I agree. It depends upon the terms of the lease (read carefully) and your driving habits. This isn’t you, but my neighbors who plow (three of them) all lease through their businesses and only keep them as long as warranty can cover their butts with plowing taking a heavy toll on the mechanics. They avoid big repair costs. So it seems to be use dependent.

Financially speaking…Buy the vehicle…then keep it for 300k miles.

Talk to your bank or credit union and tell them you want some background information before you buy a car. Ask about rates and other terms for both new and used cars. If you get a 3 year loan on a 6 year old car, it will be 9 years old when you pay it off. A bank might be reluctant to give you a loan on a car much older than that, but you have to check with them to be sure. I’m sure that your bank or credit union would be happy to give you the information.

Since you aren’t attached to the new car smell, I wouldn’t bother with leasing. Yes, you get to drive a new car every 3 or 4 years and will most likely only have to worry about oil changes and maybe an air filter change in that time. But, you have nothing to show for those years of payments except for more payments afterwords.
Conversely, you could buy a car that’s come off-lease and get a pretty good deal out of it.

Usually when people ‘buy’ a new car they will actually finance it through a personal loan or PCP agreement, very few people pay cash up front.

If you want a personal loan, then that will of course pay for the whole car over a set number of years. You will own the car through this process and are free to sell/keep the car at your will. The risk you take with a loan is that the car depreciates faster than you repay the loan, so you actually owe more after 3 years than the car is worth so you would sell at a loss or keep it longer and risk problems/MOT etc.

If you take up a PCP agreement this is very similar to leasing, the main difference is that at the end of the contract you have the option to buy the car at the residual price you agreed at the start of the PCP. This is good if the car is actually worth more than that value, as long as you have enough money to save up for this payment while making monthly payments on the PCP, as you can then sell it on to keep the profit.

If you take up a lease then in the same way as PCP, the residual value of the car is pre-determined and discounted from the buying price. At the end of the term, you hand the car back regardless of its actual value.

Leasing and PCP although similar have their own advantages and disadvantages which you should look into.

You can compare new/lease cars side by side on sites such as which will also tell you the tax implications if the lease is put through a company.

In both cases you’re talking about buying a new car in 2-3 years. Financially that is the DUMBEST thing you can do. If that’s what you want…and you don’t mind wasting money…GREAT.

From a financial point of view…buy the vehicle you want and keep it for no less then 250k miles. For most people this is 10-12 years. Take a loan out for 5 years…and the next 5 years keep making payments to yourself. Then when you’re ready to buy you have the money for a new car CASH. I bought my first car with CASH when I was 30…been doing it ever since.

If you live in a metro area consider going without a car and using Zipcar. It will probably be cheaper if you don’t commute via auto to work.

Leasing is basically a long term car rental. You pay money per month, use a car for a while, and pay all damage done. Remember the house always wins and the dealer is the house.

You are wise to ask around for opinions. Opinions vary and I am among the crowd that looks for a good used car deal, pays cash and realizes that I will likely pay for some repairs with SOME of the savings in the purchase price. My method works very well for me because I am very familiar with automobile repairs and maintenance. A 3 year old Camry or Accord can be a great buy. And it is somewhat certain that a lease is a losing proposition for an individual. It is the worst possible choice for most people. And many businesses lease vehicles from a subsidiary corporation for tax and liability reasons. They wouldn’t lease from a dealer.

It’s kind of a no brainer best way to buy a car. You have money earning interest instead of paying out interest, so the real savings is much greater that just amortizing the cost of the car one way vs the other. For me who didn’t even want to take out much of a loan at all for the first, the hard part was saving for that first new one while driving junkers. Our “can’t wait” society finds it hard to do.

Our “can’t wait” society finds it hard to do.

Can’t agree more…

The first newish vehicle I bought when I got out of college was NOT the vehicle I wanted. But I couldn’t afford the car I wanted…So I settled…then kept that vehicle for 8 years (250k miles)…sold it and then bought a new vehicle (the one I wanted CASH). A car purchase will most likely be the second most expensive thing you buy.